It wasn’t all that long ago that agriculture was one of the bright spots in the overall U.S. economy. But, with the decline in crop and livestock markets, many producers are searching for ways to cut costs and market their commodities in such a way as to make a profit.
If the ag economy were compared to a road, we had been traveling on a smooth, straight blacktop highway that was headed slightly downhill and in perfect driving weather. But, now the road is going uphill, with lots of curves and potholes. While we can wish the circumstances were different, the reality tells us we have a rough road ahead of us.
From a practical standpoint, two keys to successfully navigating a rough road is making sure your truck can handle the load you’re carrying, and that you don’t run out of fuel. First, the truck you’re driving is the equity you have in your farm. This needs to be figured using a realistic balance sheet that compares your assets at current market values with your existing debts.
The load you’re hauling are pallets of seed – which represent the debt you have with your bank, JD Credit, payables due to your suppliers, etc. Depending on the size of the truck, you can haul either a little bit or a lot. Just as a 1-ton truck can safely haul more seed than a half-ton truck, so a producer with more equity can handle more debt than one with a lower amount.
If you’re hauling a small load, then you can accelerate or stop quickly, or swerve to avoid an obstacle without risk of wrecking or damaging the truck. But, in an effort to make a trip count, it is tempting to try to load the truck with more than what it’s designed to handle. The consequences of overloading the truck aren’t as noticeable when the road is good. But, when the road is rough and full of potholes, or uphill and in bad weather, the risk of danger increases significantly for a truck that’s not loaded properly.
In this analogy, your banker is the mechanic who is evaluating your truck’s ability to handle the load. You may be looking to put another pallet of seed on by upgrading your combine, buying a new tractor, purchasing a new farm, etc. But, given the current ag economy, the driving conditions are much more risky, making it vital to make sure the truck is not overloaded.
If your equity represents a farm truck, your working capital is like fuel in the truck. When you’re heading downhill on a straight, smooth road with a tailwind, fuel is less of a concern – even when the truck is loaded to the max. But, when you’re heading uphill and you can’t see around the corner to know if you’re at the crest yet, then you need to watch your fuel closely. You certainly don’t want to run out of gas when you’re transporting a heavy load up a challenging road.
As a final note, all of us in the ag industry will be facing similar driving conditions. Even if you have a properly loaded truck that’s got plenty of fuel, you will still need to keep both hands on the wheel and your eyes wide open. We may have a rough road ahead, but it’s one that we’ll have to handle one curve and one pothole at a time.
